When will interest rates affect home prices?

Asked by Douglass Mcneil, Palo Alto, CA Thu Jun 27, 2013

Rates have been steadily increasing...but w/ a really big jump this past week.

I wonder if we are now going to see a meaningful impact on home prices? Or would rates need to increase even to higher levels before we see that happen?

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Cindy Davis’ answer
Cindy Davis, Agent, San Diego, CA
Thu Jun 27, 2013
Just read an article on this today...It said that once rates start climbing over 5%, renting may become more affordable.. Until that point, rates are still relatively low and folks will continue to buy.
1 vote
Elena Talis, , Palo Alto, CA
Thu Jun 27, 2013
With the current shortage of housing I don't expect home prices to drop at all. Based on what I see around - the homes are still selling, still with multiple offers. But now it would sell with 3 offers while at the beginning of the year it we would sell with 12. The prices are stabilizing for now while market is slowing down a bit.
Web Reference:  http://talisrealestate.com
2 votes
Scott Godzyk, Agent, Manchester, NH
Wed Sep 4, 2013
Rates will affect the amount of buyers, if buyers decrease values will stop increasing. The one thing that is keeping values steady is a lack of homes for sale.
1 vote
Suz A, Agent, Longmont, CO
Wed Sep 4, 2013
The pudding has some proof.

Here in the Denver metropolitan area, prices rose in July as if nothing happened. Home prices are as high as they have ever been here. And, the expectation is that still higher rates are not going to take the shine off the market.

Inventory is not getting any help from foreclosures in Colorado. While there is new home construction going on, it has not resembled to the go-go years before 2007.

There is a point at which rates will cool off buying. Affordability gets away from consumers eventually. The experts think that number is around 7 percent.

As the economy continues to improve, consumers will chase prices higher, perhaps helped by creativity. Perhaps the thing we should look at is whether lending will be too restrictive. If people need to show income for a mortgage loan, the retirement-age demographic will have to stay put because they won't be able to buy.

The other thing to keep an eye on is the percentage of first-time buyers entering the market. If there is no one pushing at the top, sustainability becomes a concern. We need more high-paying jobs.
1 vote
a3hicks, Home Buyer, Kansas City, MO
Wed Sep 4, 2013
There are really two factors that impact home prices: 1) cost of money (interest rates), and 2) inventory (scarcity).

1. As interest rates fall, buyers get into the market (driving up prices). As interest rates rise, buyers shy away from the market (prices should decline as sellers need to incent buyers and/or help them qualify).
2. As the number of houses on the market increase, home prices tend to fall regardless of interest rates. And as inventory is low, regardless of interest rates, home prices tend to rise.

And, in general, prices will be more firm regardless of interest rates in desirable neighborhoods.
1 vote
Juliana Lee, Agent, Palo Alto, CA
Mon Jul 1, 2013
The first impact will likely be on investment properties. Decisions real estate investors make about buy/sell are heavily based on cash flow. While talking with many open house visitors and with buyers making offers on homes, there are definitely concerns starting to be brought up. So far probably more changes in talk than in actions. Many current buyers have made repeated offers and been rejected.

Short term the increase may actually lead buyers who are ready to buy, to act sooner. Keep in mind that as interest rates climb not only does the payment increase but the rate of building equity decreases even though the payment is higher. http://julianalee.com/reinfo/mortgage.htm

For prices to decrease, sellers have to be motivated to sell. I don't yet see signs of sellers changing their plans. As the economy shifts returns on various investments, decisions about real estate will slowly change. Many local buyers have been selling stock to fund the purchase of homes.

I've been looking at plotting some of my statistics by month rather than by quarter. I'll probably achieve this for some of my statistics this week when I do my update for sales through June.

Palo Alto real estate statistics at http://julianalee.com/palo-alto/palo-alto-statistics.htm

Juliana Lee
Top 2 agent nationwide at Keller Williams Realty, the nations largest
Cell 650-857-1000

Over 20 years experience
Over 1,000 homes sold in Santa Clara and San Mateo Counties
Web Reference:  http://julianalee.com
1 vote
Terri Vellios, Agent, Campbell, CA
Fri Jun 28, 2013
Interest rates affect buyers qualifications and investor's expected leveraged of return.

We have seen inventory and interest rates creep up. The amount of bidders in multiple offers have decreased. Home prices have not decreased. We have seen interest rates and home prices well above where they are today and people still were buying and selling.

I believe the real question is to you personally. How does the increased interest rate affect your decision to buy?
1 vote
Suz A, Agent, Longmont, CO
Thu Jun 27, 2013
Mortgage rates tend to stay on track with interest rates. The effect is being felt today as mortgage rates climb at the highest pace in 26 years to 4.46 percent, which is still historically low. Buyers need to scramble. As inventory responds to higher prices, this could be a very good year here in Longmont, CO.

As for derailing the current recovery, the expectation is that 7.5 percent will have a significant cooling effect. Buyers who are struggling to find homes in the current climate may have an opportunity to revisit home purchasing later - if the market cools off. I look at the situation as fluid. Rising rates usually chase more buyers into the market.

Stay tuned.
1 vote
Marcy Moyer, Agent, Palo Alto, CA
Thu Jun 27, 2013
Douglass in order for home prices to drop, we will need to have more than just an interest rate hike. The market in 1999-2000 was almost as crazy as now and interest rates were over 8%. At that time, like now there was a lot of cash in the market which helps to mitigate the lower buying power of purchasers. Like now, the employment rate was so high that the competition for homes was fierce.

Home prices did not go down until the dot com/stock market bust in 2001.

So while home appreciation may slow down, which it historically does in the sumer anyway, home prices will not go down unless the job market crashes. Without that the demand is so over heated that it will take more than a 1% increase in mortgage rates to make home prices drop.

So when the job market tanks so will home prices. Until then I believe it will be a question of what is the rate of appreciation, not depreciation.

Marcy Moyer
Keller Williams Realty Palo Alto
DRE 01191194
Web Reference:  http://www.marcymoyer.com
1 vote
Eric Nelson…, Mortgage Broker Or Lender, Campbell, CA
Thu Jun 27, 2013

Higher interest rates naturally will reduce the buyer group, particularly the first time homebuyers who are less experienced with rate changes.

We have seen interest rates increase 6 consecutive weeks since May 3, and this week we are finally seeing some correction (particularly today and yesterday).

The real question is how much does this impact the real estate sellers? Of course, it depends. The larger home prices are usually sold to higher income people who do not blink at an interest rate change of 1%.

However, lower income buyers (under 100k in income) this is a significant jump in affordability and for a home price of $650-700k, payments just went up $300-$400 per month. That is quite enough to slow down this bracket.

If rates continue their steady climb, (quite likely given the commentary coming out of the Fed and Ben Bernanke) then certainly it will slow down sales activity, but having the biggest impact on lower sales values in the Bay Area.

Best regards,

Eric O. Nelson, III
Sr. Mortgage Planner
SVC Funding
DRE # 01258488
NMLS # 120412
1 vote
The Stephen…, Agent, Portland, OR
Thu Jun 27, 2013
As soon as they go up! I don't imagine homes will sell for less, unless the interest rate for some unfathomable reason goes over 10%. However if interest rates keep rising, the price appreciation most are experiencing right now will slow down significantly.
1 vote
Aileen La Bo…, Agent, Los Altos, CA
Thu Jun 27, 2013
Hi Douglass,
I hope you're doing well, this fine Summer's day :)
As you know, our local real estate market is always changing, but some times are more dynamic than others. We're currently seeing a fairly dramatic shift in our market—we may well look back and consider this to be a pivotal time.

Interest rates were lowered to stimulate the economy, including real estate activity. This strategy has worked very well. Now, interest rates may have bottomed and slowly begun increasing, possibly generating a new cycle. In recent days, Federal Reserve Chairman Ben Bernanke has clarified the Fed’s outlook for the conclusion of Quantitative Easing (QE), saying he anticipates that the Fed's likely to begin 'tapering' its bond purchases late this year, and end them in 2014 if employment improves as he expects. Will this be the final chapter of QE? It sure looks possible.

Just the mention of this 'tapering' sent the stock market to its worst two-day decline of the year, and pushed 10-year Treasury yields to their highest level in almost 2 years. Since bottoming out at 1.4% last summer, rates have risen more than 60 percent to 2.4%. Long term bond rates influence mortgage rates, so it's not surprising that mortgage costs have ticked higher in the past month. The average 30-year fixed-rate conforming mortgage has climbed to 4.17%, the 6th straight weekly increase and the highest since March 2012.

What does all this mean for the housing market?

The good news for buyers is that although interest rates have edged a little higher, they're still historically low—at least for now. Those buyers who have been sitting on the sidelines may want to step in, as there is clearly potential for continued rate increases.

In talking with our local office here at Coldwell Banker, it appears that many buyers have gotten that message, and are accelerating their activity. The challenge is that while inventory is gradually increasing, it continues to lag strong buyer demand. Multiple offers are still the norm. Sellers who are ready to act are able leverage this climate, and in most cases find high demand and aggressive offers for their homes.

The real question is when this trend will move closer to buyer advantage. For sellers who are waiting for prices to peak, any continued uptrend in interest rates will have a drag effect on buyers in terms of how much they can afford to borrow (and therefore spend). Demand is likely to soften as some buyers decide they need to compromise on home size home, location and condition/amenities. The balance of supply and demand doesn’t have to shift all that much to become a tipping point.

So, the short answer is 'Yes', the increasing interest rates will have an effect. There's still pent-up demand and there are many other factors that influence the choices that buyers make, so that effect isn't likely to be instantly dramatic, nor is it likely to send home prices tumbling down, but it will very likely help to put a lid on some of the dramatic increases we've seen.
1 vote
Robert Chome…, , San Diego, CA
Wed Sep 4, 2013
I think higher rates along with increasing inventory is slowing prices right now as we speak. The thing is a lot of the national data you get on home price appreciation is backward looking. We won't know what's happening right now reflected in the numbers for 4-6 months. I think those numbers will slow a significant slow down in appreciation.
0 votes
Elena Talis, , Palo Alto, CA
Wed Sep 4, 2013
The rates will affect the prices when enough buyers will be priced out of the market to create a surplus of homes available for sale. In reality, at the end of August we had just 2 weeks of inventory while we need more than 3 month inventory to shift at least some power to the buyers. In other words - no time soon.
Web Reference:  http://talisrealestate.com
0 votes
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